Scottish & Newcastle Plc v Raguz

This appeal is brought from an order of Mr Justice Hart made on 11 April 2006 after a nine day trial. The clarity and perceptiveness of the analysis and discussion in the judgment, and its presentation of the factual and legal subject-matter in a very readable manner, are characteristic of the judge, and a vivid reminder of how much the law has lost by his recent premature death.

The appeal requires the court to consider points arising as between the landlord and the original tenant, where the lease has been assigned, the lease being one in existence when the Landlord and Tenant (Covenants) Act 1995 came into force on 1 January 1996, but being affected by that Act. It also involves the obligations as between the original tenant under such a lease and its assignee (not being the current occupying tenant) where the occupying tenant defaults under the lease, the landlord seeks payment from the original tenant and the original tenant in turn claims over against its assignee under section 24 of the Land Registration Act 1925. Although the leases in question predate the 1995 Act, the points under that Act apply to tenancies dating from after as well as before the Act, though the points under the indemnity covenant implied by section 24 of the 1925 Act do not arise under more recent leases, that section having been repealed by section 30 of the 1995 Act.

This is the second occasion on which this court has had to consider these proceedings. On 24 July 2003 the court dismissed an appeal by the Defendant against an order made by His Honour Judge Norris Q.C. granting judgment under Part 24 in respect of part of the claim made in these proceedings: [2003] EWCA Civ 1070. The remainder of the claim came on for trial before Mr Justice Hart in January 2006. The judge gave judgment for the Claimant, but gave permission to appeal to the Defendant. The Defendant raised two points in pursuance of that permission. The Claimant then served a Respondent’s Notice challenging the judge’s decision on another point. The latter point is logically the first to be considered on the appeal.

The Claimant is the original tenant under two underleases dated 17 March 1967 and 7 March 1969. The term granted by each lease expires on 22 March 2062. The Defendant took an assignment of both leases from the Claimant in 1982. It assigned them on in 1983. During the period relevant to the proceedings the premises were occupied by a later assignee, Hotel St James Ltd (HSJ), which went into administrative receivership in 1999. At that time the reversion was owned by National Car Parks Ltd (NCP).

The amount of the rent due under each lease was increased as a result of two rent reviews, one completed in September 2000 under the 1967 lease and the other in July 2001 under the 1969 lease, with effect from review dates in 1995 and 1996 respectively. Undoubtedly the reviewed rents were due from HSJ, but it did not pay them. NCP demanded payment of the same amounts from the Claimant, which paid them. The question is whether the Defendant is liable to indemnify the Claimant for these sums under the terms of section 24(1)(b) of the Land Registration Act 1925.

Faced with the prospect of exposure for rent falling due far into the future, as well as for sums already due arising from the rent reviews, the Claimant decided on a strategy to protect its own position, on the premise that the best solution was for a solvent purchaser to be found for the business and the leases. In order to make that more likely, the Claimant decided to support the administrative receivers in their attempts to dispose of the leases, and to assist them in keeping the business running, in order to be able to offer a going concern for sale. A purchaser was found in 2000, to whom the business and the leases were eventually sold, but not until 28 February 2003.

In June 2001 NCP demanded payment of £346,313.32 arrears of rent from the Claimant. The Claimant paid that amount in July 2001. By 28 February 2003 further sums had fallen due under the leases, amounting to £245,714.55. NCP required payment of those sums as a condition of agreeing to the assignment of the leases to the purchaser. The Claimant paid that amount. The present proceedings had been commenced in September 2001, seeking payment of the £346,313.32 and a declaration as to future liabilities. By virtue of an amendment the claim included the £245,714.55 as well by the time it came to trial.

The judge held that the Claimant was entitled to an indemnity from the Defendant “in respect of those sums properly sought from it by NCP” under the two leases, and ordered payment of £543,059.54 being the total claimed, less the amount covered by the judgment under Part 24 and subject to certain other adjustments which are not relevant to the appeal.

The three issues on the appeal are as follows:

Was the Claimant legally liable to pay to NCP all the rent arrears that it did in fact pay? As to some payments, no question arises on the appeal, including those covered by the summary judgment. As to others a different question arises, mentioned at sub-paragraph (iii) below. The point at issue here, however, is whether it is a precondition to such liability that the reversioner should have served notice on the original tenant under section 17(2) of the Landlord and Tenant (Covenants) Act 1995 within 6 months of the original unreviewed rent falling due, followed by a notice under section 17(4) on the completion of the review, or whether it is sufficient to serve notice under section 17(2) when the rent review has been completed. This is the point raised by the Respondent’s Notice.

If the judge was right to hold that a notice under section 17(2) should have been served at the first stage, followed by one under section 17(4) after the rent had been reviewed, so that NCP could not have sued the Claimant for that part of the arrears in respect of which no such notices were served, was he right to hold that the Claimant was entitled to an indemnity from the Defendant in respect of the sums which it actually paid to NCP on account of that part of the arrears of rent under the lease?

As regards £49,350 of the rent, for which notices under section 17(2) were served in due time on 27 February 2003, just before the rent was paid by the Claimant, the issue is whether the Claimant is entitled to an indemnity despite it having prompted NCP to serve those notices.

At common law the original tenant remains liable in contract for the rent falling due under a lease throughout the term, regardless of having assigned the lease. He is entitled to an indemnity from the assignee under provisions to be discussed later.

The 1995 Act changed this position, and did so (in certain respects) as regards existing leases as well as those granted after its commencement date on 1 January 1996. Much of the Act was based on recommendations of the Law Commission in its report Landlord and Tenant Law: Privity of Contract and Estate (Law Com 174), but sections 17 to 20 were not part of the Law Commission’s recommendations.

Section 17, so far as relevant to a lease already in existence on 1 January 1996 and to the facts of this case, is as follows:

If a former tenant pays in full “an amount which he has been duly required to pay in accordance with section 17”, then section 19 gives him the right to require the landlord to grant him an overriding lease of the premises. In that way he may obtain some control over the tenant’s position under the relevant lease.

A notice under section 17(2) or (4) must be in the form prescribed for the purpose, or in a form substantially to the same effect, failing which it is not effective under the section: see section 27. The prescribed form of notice under section 17(2) has a number of relevant features. It includes the following substantive paragraphs:

The judge described the problem to which these provisions give rise in the following terms, at paragraphs 24 and 25 of his judgment:

The rent review provision in the leases is not very elaborate. It is as follows, omitting irrelevant passages, and quoting from the 1967 lease:

Under the 1967 lease, the rent payable was to be reviewed as at 17 April 1995. Before that date it was £24,200 per annum, so that (including VAT) £7,108.75 was payable each quarter. Rent was paid at that rate until (and including) 25 March 1999. As a result of the rent review, the annual rent from the review date was determined as being £68,000 (or £79,900 with VAT). That led to a demand for arrears back to 1995, and up to 28 September 2000, of £279,849. A similar pattern applied under the 1969 lease, though the amounts were smaller.

If the judge’s conclusion on section 17 was right, then the landlord needed to serve a section 17(2) notice within 6 months after each quarter pending the rent review, even though until June 1999 HSJ was not in arrear. The notice would have to have included paragraph 4 in accordance with the prescribed form. It would have stated (as required by paragraph 3) that payment of the amount then due and unpaid, specified in the Schedule, was required, but the Schedule would have said that no sum was then unpaid, and the notice was only served in case, when the rent review had been completed, a higher rent was fixed and the then tenant did not duly pay the amount which thereby became due for the particular quarter. Mr Stoner for the Claimant characterises such a protective notice as a sham, or at least a misrepresentation, and the sequence of such notices which would be necessary as giving rise to a substantial administrative burden, and leading to a result which is not at all tenant-friendly.

If, on the other hand, Mr Stoner’s argument to the contrary is right, then a former tenant may receive a notice under section 17(2) for the first time after the completion of a lengthy rent review process, requiring him to pay a substantial amount relating back for a considerable number of years of which he has had no prior warning, despite the apparent intention of the Act that there should be such a warning, quarter by quarter. Moreover it is not easy to discern in what circumstances the two-stage procedure under subsections (2) and (4) would apply, unless the current tenant is already in default as regards the current unreviewed rent. The legislation does not deal satisfactorily with the case where the amount already known to be due is being paid but the amount due may be increased as a result of, for example, a rent review provision, with the risk that the increased amount may not be paid.

The question turns first on the language of sections 17(2) and (4). Mr Bannister Q.C. for the Appellant, submitting that the judge was right, pointed out that the words of section 17(2) refer to liability to pay “any amount in respect of any fixed charge” under the lease, and that section 17(4) refers to a limitation of the amount of liability “in respect of the fixed charge in question”, and to liability “in respect of the charge” (which must mean the charge in respect of which a notice under section 17(2) was served) being later determined to be in a greater amount. He argued that this shows that the section proceeds on the basis (which is correct as a general principle of landlord and tenant law) that if rent is subject to review there is still only one charge for the rent, albeit that the full amount may not have been determined by the date for payment of the rent.

We were shown some passages from authority about the nature and effect of rent reviews. In C.H. Bailey Ltd v. Memorial Enterprises Ltd [1974] 1 W.L.R. 728, Lord Denning MR said at page 732:

Nothing in the terms of the present leases justifies a different approach to these matters. Thus, Mr Bannister submitted, the full amount of the rent accrued due quarter by quarter after the end of the 28^th year of the leases, even though the full amount could not be known until the rent review process was complete, and although when that process was complete the arrears, back to the start of the 29^th year, did not become due for payment until the next following usual quarter day. Despite that, the full amount of each quarter’s instalment of rent was a single fixed charge, in the terms of section 17 of the 1995 Act.

On that basis he contended that, for the purposes of section 17, the date on which “the charge becomes due” is the relevant quarter day, and that, while a rent review process is pending under the lease, the liability in respect of the charge for that quarter’s rent may possibly come to be determined to be for a greater amount than is known on the quarter day. Accordingly, he argued, the 6 month period under section 17(2) runs from the quarter day, for the whole amount of the rent attributable to that quarter, and if the landlord wishes to preserve the possibility of recovering the reviewed rent from the original tenant (if the current tenant does not pay it when it has been determined) he must comply with section 17(4)(b) by giving notice of the possibility that the liability for the rent will be determined to be for a greater amount.

The anomaly resulting from that argument is that the landlord would have to give a notice under section 17(2) within 6 months of a quarter day when a rent review was pending even if the current tenant had paid the unreviewed rent, so that nothing could then be said to be due and unpaid.

Mr Stoner’s primary submission to the contrary is that there are two charges in such a case: the unreviewed rent falls due for payment on the quarter day in question, and the backdated reviewed rent falls due for payment on the quarter day following the determination. So, he said, a section 17(2) notice need only be served within 6 months of the original rent day if the current tenant was in default as regards the unreviewed rent. A separate section 17(2) notice would be served within 6 months of the quarter day following the determination of the rent review, if the current tenant was in default as regards the backdated reviewed rent. That would be true whether or not a section 17(2) notice had been served after the original rent day because the current tenant was then in default.

Mr Stoner’s argument involved the proposition that the retrospective element in the rent arising on the determination of the rent review only becomes due, in the sense of due for payment, on the quarter day after the determination. That is established by South Tottenham Land Securities Ltd v. R & A Millett (Shops) Ltd. The next step in the argument is that “becomes due” in section 17(2) means “becomes due for payment”. If that were so, it would follow that only the unreviewed rent became due on the original quarter day, and the backdated element of the reviewed rent does not fall due for payment until the later quarter day, the first after the determination.

That argument, however, does not seem to me to fit with the language of the section, and it allows almost no scope for section 17(4) to operate. It is plain, from the section and from the prescribed form and its footnotes and Notes, that section 17(4) was envisaged as applying where a section 17(2) notice was served after an initial default but a rent review was pending so that the amount eventually recoverable in respect of that quarter’s rent might turn out to be greater. It required no reference to Hansard to establish that as matter of legislative contemplation. At the court’s request, Counsel found a passage in Hansard where the Lord Chancellor (Lord Mackay) moved an amendment which introduced sub-sections (3) and (4) into section 17. His explanation is consistent with, but does not add to, what one can gather from the text of the section and from the prescribed form and its associated text.

Mr Stoner suggested that section 17(4) could still have some purpose, because it could apply if the amount of the fixed charge had been determined in an amount, for example on a rent review, but the landlord contended that it should be a still higher amount, for example by challenging the validity of the rent review determination. I can see that section 17(4) could apply in that case, but it is such a rare and unlikely situation that it does not seem to me that it could account for the section on its own. In my judgment section 17(4) must have been intended to apply in a case where the rent is liable to be raised as a result of a rent review, and is later so raised with retrospective effect.

It is reasonably plain that thought was not given, in the formulation of the section as it stands, to the case where there is no default as regards the unreviewed rent, but there is a pending review and there may therefore be a default later which is attributable to an earlier quarter, even though the amount in question did not fall due for payment until later. The legislation does not fit easily with that situation, because, on the judge’s interpretation of the section, the landlord must give a protective section 17(2) notice at a time when no sum can be specified in the Schedule to the notice as being due and unpaid. Mr Bannister drew back from a contention that he made at one stage, namely that the amount could be specified in general terms, rather than as a quantified sum of money; he was clearly right to do so. He accepted that it might seem odd to give a notice under section 17(2) saying that the instalment of rent mentioned in the Schedule “is now due and unpaid”, when nothing already due for payment is in fact unpaid, and saying that the landlord intends “to recover from you the amount specified in the Schedule”, when the Schedule says that the amount currently recoverable is nil, though also saying, in terms of paragraph 4 of the prescribed form, that it is possible that the liability in respect of the charge for rent mentioned in the Schedule will later be determined to be for a greater amount. He submitted, however, that this was a minor oddity which was otherwise consistent with the language of the section, whereas Mr Stoner’s primary submission could not be squared with the words of the section at all.

Mr Stoner’s alternative submission was that a notice under section 17(2) should be given if there is a default as regards the unreviewed rent, with paragraph 4 of the form included so as to bring section 17(4) into operation, and then a notice under section 17(4) within 3 months after the quarter day following the determination, but that, if there was no default as regards the unreviewed rent, the two stage approach did not apply, and the landlord could serve a section 17(2) notice for the first time within 6 months after the quarter day on which the retrospective element of the reviewed rent fell due for payment.

I do not see how the section can be construed to apply differently in those two cases. Nor do I see why, as a matter of policy, the legislation should have provided for advance warning by way of the two-stage process under the two sub-sections in a case where the unreviewed rent is in arrear, but not when that amount is up to date.

The judge’s reasons for holding that protective notices, under which the landlord would have to specify “the amount” which he intends to claim either as “nil” or as “nothing at the moment, but wait and see”, are necessary is contained in paragraphs 34 and 35 of his judgment:

Mr Stoner pointed out that the original tenant, knowing the terms of the lease, would know when there was liable to be a rent review: in this case it would be in 1995, 2009, 2023, 2037 and 2051, under the 1967 lease. It would therefore not need to be put on notice of anything else, unless and until the rent review took effect with a determination of the new rent, and even then only if the current tenant defaulted.

He also submitted that the original tenant, on receipt of a section 17(2) notice, was intended to be able to do something to protect himself, namely to pay the amount specified in the Schedule and then take an overriding lease under section 19, in order to have some control over the current tenant’s actions and the situation in general.

It seems to me that the policy of the Act should not be understood as limited to ensuring that the original tenant gets notice at a time when he can do something to protect himself. The policy of the Act is to ensure that original tenants get prior notice of the possibility that they will be looked to for the recovery of rent under a lease which they may have assigned many years before. That policy could have been achieved by legislation which drew the distinction which Mr Stoner seeks to make, in the case of a rent review, between the fixed charge for the unreviewed rent when a rent review is pending, and a separate charge for the retrospective element in the reviewed rent, once it has been determined. The language used, however, does not seem to me to permit that interpretation. I therefore agree with the judge as to his conclusion and his reasoning. As he held, if a landlord wishes to preserve the possibility of claiming against an original tenant when the rent is subject to review, he must serve section 17(2) notices within 6 months after each rent day in turn, specifying in the Schedule that the sum intended to be recovered is then nil, but subject to paragraph 4 of the notice and the possibility of the rent being determined to be a greater sum. I can see that this will be a burden on landlords and could seem pointless and inconvenient for original tenants. But it seems to me that this is the result of the legislative language chosen, and the arguments from anomaly do not persuade me that a different reading should be adopted. I would therefore reject the point taken in the Respondent’s Notice.

On the basis that the judge was right to hold that advance protective notices under section 17(2) of the 1995 Act were required, it follows that, as regards large parts of the money claimed, NCP had not done what it needed to do to be able to sue the Claimant for the arrears. Nevertheless he held that, having paid the arrears (for its own good commercial reasons), the Claimant was entitled to be indemnified for them by the Defendant. This turns on the scope of the indemnity provision in section 24(1)(b) of the Land Registration Act 1925, which has been repealed, but not so as to affect its application to tenancies which are not “new tenancies” under the 1995 Act.

This section implies into the assignments of the respective leases from the Claimant to the Defendant a covenant as follows:

The question is whether the relevant sums paid by the Claimant to NCP were within the scope of the indemnity as being “expenses” or “claims”, in either case “on account of the non-payment of the said rent or any part thereof”. Mr Stoner contends that they were either claims (having been claimed from S&N by NCP) or expenses (having been spent by S&N), and that they arose because the current tenant, HSJ, did not pay the rent due. That non-payment involved a breach by Mr Raguz of the first part of the covenant in section 24, namely that he “and the persons deriving title under him will pay … the rent … by and in the registered lease reserved … and on the part of the lessee to be paid”. The expense or claim resulted from that, and the transferee, having paid the sum claimed, was entitled to be indemnified.

Mr Bannister submitted that, where Parliament affords the original tenant a complete defence to liability for rent not paid by the current tenant, it cannot be right that the original tenant can nevertheless pay the rent, which it could not be obliged to pay, and be indemnified against that voluntary payment. The protection afforded to an original tenant under section 17 should be passed to assignees in turn.

The question turns on the wording of section 24, but some assistance may be gathered from decided cases. Mr Bannister relied in particular on Smith v. Howell (1851) 6 Exch 730. In that case a lease had been granted to G, who assigned the term to the Plaintiff, who later assigned on to the Defendant, each assignment containing normal covenants to perform the obligations under the lease and to indemnify the assignor. The Defendant’s covenant, set out at page 731 of the report, was in substance very similar to that implied by section 24. Rent not being duly paid, and the premises being out of repair, the freeholder sued G for the rent, and got judgment by default for the rent and for damages for the want of repair. G paid these amounts and then sued the Plaintiff for the amount so paid and his costs. The Plaintiff defended that action unsuccessfully, and became liable to pay the sum claimed and G’s costs. Not yet having paid, he sued the Defendant in turn. He was held entitled to be paid the amount of rent and damages payable to G, and the costs of the freeholder’s action against G, but not the costs which he had incurred in his unsuccessful defence of G’s action. Pollock CB said that the rent and damages and the costs of the freeholder’s action against G were “properly incurred for the purpose of ascertaining the amount of the Defendant’s liability” (including quantifying the liability for the want of repair) but that all costs thereafter were unnecessary and superfluous and could not be recovered. He said, at page 737:

Mr Bannister relies particularly on the phrase “under which the party charged became responsible” as showing that the party claiming to be indemnified against a payment to a third party, such as for rent, must have been legally liable to make that payment. It does not seem to me that those words carry that meaning, not least because the “party charged” is the indemnifier, not the party to be indemnified. The case does show that there are limits to what can be claimed under an indemnity obligation, but it does not by itself show that there is a limitation by reference to whether the sum in question was legally due from the person to be indemnified.

Mr Bannister also pointed out that, absent a covenant such as is imposed under section 24, the general law would require the assignee only to indemnify the original tenant (or a previous assignee) against sums which the latter has been compelled, or was compellable, by law to pay: see Moule v. Garrett (1872) 7 LR Exch 101. That is true, but it does not lead to any inference as to the scope of the express obligation to indemnify set out in the section.

Moving away from leases, in Alexander v. Vane (1836) 1 M&W 511, the Plaintiff gave an oral guarantee to P that the Defendant would pay for certain goods ordered by him from P: if the Defendant did not pay P for the goods, he (the Plaintiff) would do so. The Defendant did not pay the full amount due and the Plaintiff did so in his place. He then sued the Defendant for the amount so paid. The Defendant resisted the claim on the basis that the Plaintiff could not have been made to pay, because the guarantee, not being in or evidenced in writing, was unenforceable under the Statute of Frauds. The Defendant was held liable notwithstanding this argument. Lord Abinger CB said at page 513:

By itself that case might not be strongly persuasive, as the point was not put in the same way as was argued before us. However, in Re Chetwynd’s Estate [1938] Ch 13 it was followed in a case where the ground on which the payer was not liable to pay was non-compliance with the Moneylenders Act 1927. The liability arose on a joint and several promissory note, where it was clear that one of the two parties (C) was the principal debtor and the other (S) was, as between them, in the position of a guarantor. The note did not comply with the 1927 Act. Unaware of this, S paid that which C had failed to pay, and claimed that amount from C’s estate after his death. The court considered what was to be implied as a term of the transaction between C and S, it being argued against S that C’s implicit request to him was not “Please pay if I do not” but rather “Please pay whatever sum, if any, I am liable to pay under the contract, but do not pay”. Greene MR rejected that argument and held, at page 17, that “the simple implication which arises here is a request by [C] to pay if he, [C], does not pay”. The other members of the Court of Appeal agreed. They all considered Alexander v. Vane as helpful, and as distinguishable from a later case, Sleigh v. Sleigh (1850) 5 Exch 345, on which Mr Bannister also relied, which was concerned with bills of exchange.

Another case about a bill of exchange which contains a passage of some relevance is Ex parte Bishop, Re Fox Walker & Co (1880) 15 Ch D 400. An accommodation bill had been drawn and accepted, and had then been discounted with bill brokers, who were held entitled to make themselves liable on the bill and entitled to claim against the acceptor for sums paid by them in respect of the bill, as guarantors. A second judgment of the Court of Appeal dealt with the ancillary question whether the bill brokers were entitled to claim for interest on the amount which they had paid. At page 422 Cotton LJ, giving the judgment of the court, said this:

Some help may also be obtained from a more recent decision, concerned with an express obligation to indemnify. This is Argo Caribbean Group Ltd v. Lewis [1976] 2 Lloyd’s Rep 289. In that case, simplifying the facts to that which is relevant for present purposes, Laytons Finance lent money to Fieldham Holdings, Argo (the Plaintiff) guaranteed to Laytons the repayment of the loan by Fieldham, and Mr Lewis (the Defendant) agreed with the Plaintiff that if Fieldham did not comply with its obligations, then the Defendant would indemnify the Plaintiff “against any losses damages costs expenses or charges which [it] may incur by reason of having given the guarantee” to Laytons. The judge held that Laytons was a moneylender, and that the loan was unenforceable because the 1927 Act had not been complied with. He also held that the obligation which I have summarised and partly quoted above was one of indemnity, not of guarantee. The point was taken that the Defendant was not liable to indemnify the Plaintiff because the Plaintiff had never been liable to make any payment to Laytons. The judge held that this was not a good defence, and the Court of Appeal upheld this decision, relying on Re Chetwynd’s Estate. Orr LJ, giving the judgment of the court, said at page 295 that:

In the present case, of course, according to Mr Stoner the relevant implied request would not be “pay [the creditor] if I do not”, but rather “pay me if I pay [the creditor]”, whereas Mr Bannister would say that it is “pay me if I pay the creditor, being legally liable to do so”.

At first sight it does seem odd that a party should be entitled to be indemnified against payments to a third party which he was not bound to make. If in Argo v. Lewis or in Re Chetwynd’s Estate the party seeking the indemnity had been aware of the defence under the Moneylenders Act at the time payment was made, it would perhaps have been quixotic to have paid the unenforceable debt, unnecessarily. In the present case, in my judgment, S&N would have been able to resist liability for most of the sums claimed by NCP because of non-compliance by NCP with section 17. However, this was by no means a clear point, and S&N would have been letting itself in for contested litigation if it had refused to pay. In addition, even if it had been able to resist payment for sums due in the past, however substantial, it faced a continuing liability for the future in respect of which NCP would be likely to regard S&N as the first call, and on which, once the position under section 17 was clarified, NCP would comply as regards future instalments. Given the sheer length of the term, this posed a serious dilemma to S&N, which might find itself faced with an effective liability for rent stretching over sixty years in the future. In those circumstances it is not surprising that S&N should have sought a commercial solution, involving finding a solvent assignee, assisting the administrative receivers of HSJ in this regard, and not creating difficulties by taking a hostile or uncooperative stance as regards NCP.

Bearing in mind that the question only arises at all because the first part of the covenant implied by section 24 has been broken, by the failure of the current tenant to pay the rent due, it seems to me that it would be wrong in principle to limit the scope of the second part of the covenant too narrowly. Mr Bannister’s approach would have required S&N to refuse to pay NCP, on the grounds that it was not legally liable to pay because of the section 17 point, and then to resist any claim that NCP brought against it for the rent, in the meantime abandoning, or at least seriously prejudicing, its attempts to solve the problem in a commercial manner by helping to find a solvent assignee.

In his judgment, Hart J gave his reasons for deciding this point in favour of S&N at paragraphs 109 and 112. At paragraph 109 he said this:

In the course of paragraph 112 he went on to say this:

As he indicated at the beginning of paragraph 109, quoted above, there was a question whether it was open to S&N on the statements of case to claim an indemnity on the basis that it paid NCP even though it was not legally liable to do so. The judge considered that and concluded that the claim could properly be approached on that basis. Given the extensive factual investigation that had gone on in the course of the nine day trial, it could not be suggested that there was other factual material which could have been relied on if the case had been put this way at the outset, but was not brought forward because of the way the case was pleaded. In his oral submissions before us Mr Bannister took the point, but by way of throwing light on what he said was the unmeritorious nature of S&N’s position, given the finding as regards section 17, rather than saying that the judge ought not to have embarked on it at all. It seems to me that, whatever might have been said at first instance, given that there was no factual evidence which was not, but otherwise would have been, adduced, it is for this court to consider the merits of the point on the basis of the judge’s findings.

It seems to me that the judge was right on this point. The scope of the indemnity is not limited to payments which the assignor is legally liable to make. Clearly it extends to payments which the assignor chooses to make, for example to its own lawyers or other advisers in considering, and perhaps defending, a claim by the landlord for the unpaid rent. I am prepared to assume that, notwithstanding the wide express terms of the covenant, there is a limitation on the scope of the indemnity to expense which is fairly and reasonably incurred, along the lines indicated in Smith v. Howell. But I do not accept that, as regards payments to the landlord, the extent of the indemnity is limited to payments which the landlord could compel S&N to make by legal proceedings. That seems to me to be particularly clearly so given the commercial strength of the landlord’s position, through its ability to decline to consent to an assignment unless all rent already due is paid.

The test of whether the expenditure was fairly and reasonably incurred is illustrated by the facts of Smith v. Howell itself, with the disallowance of the costs of an unreasonable defence by the assignor to a claim by the third party. Conversely, Lord Newborough v. Schroder (1849) 7 CB 342, at 399, shows that the costs of a reasonable defence to proceedings can be recovered. Wolmershausen v. Gullick [1893] 2 Ch 514, at 529, also supports this.

The approach of Cotton LJ in Ex parte Bishop, Re Fox Walker & Co requires an examination of the position in which the assignor would have been if the act against which he is to be indemnified had been done by the person who is to indemnify him at the time when it ought to have been done. Looking at it in this way, S&N’s position but for the breach of the first part of the covenant would have been that they could not be made answerable for the rent arrears. Mr Bannister would say that, because of the section 17 point, they could not be made liable for the rent in any event. But their reasonable desire to facilitate an assignment to a solvent assignee meant that they were, unavoidably, concerned with the arrears of rent, because someone had to pay those arrears if an assignment was to be effected. This exposure is something which, in agreement with the judge, I consider that they were entitled, reasonably and fairly, to deal with by making the payments in question, despite their not being legally compellable to pay by proceedings brought by NCP.

Thus, it seems to me that the payments made by S&N in respect of rent for which section 17 was not complied with do satisfy the “fairly and reasonably incurred” test.

For those reasons, which are essentially those relied on by the judge (though without the benefit of so extensive citation of authority as we have had) I hold that it is no defence to S&N’s claim that it was not legally compellable to make some of the payments of rent to NCP.

I turn to the third point in the appeal. The judge held that the notices served on 27 February 2003 were served as a result of the Claimant having prompted NCP to serve them. NCP’s solicitors took the position that notices under section 17 were irrelevant. In response on 21 February the Claimant’s solicitor wrote back saying:

Mr Bannister Q.C. submitted that entitlement to an indemnity does not extend to sums which would not have been due but for action taken by the party entitled to be indemnified.

There could be scope for an argument that the assignor cannot recover the sums claimed because he has brought the liability on himself. That was argued in Lord Newborough v. Schroder, but it was rejected on the facts. The conduct in question involved agreeing that the position should be determined at an earlier stage in the proceedings than the eventual final hearing. The judgment records that the assignor, taking the view that there was no defence to the claim by the third party, invited the assignee to take over the defence, which he would not do. In those circumstances it was not a very plausible argument for the assignee to say that the assignor ought to have conducted the litigation differently, and had brought the expense on itself by what it had done.

It seems to me that this is a specific example of the general proposition that expense incurred unreasonably cannot be recovered. That, therefore, is the principle to which Mr Bannister would have to have recourse for the purposes of this argument.

The point does not arise, however, if I am right in deciding that being compellable to make the payment is not a prerequisite for ability to recover under the indemnity. Even if the landlord had not served notices under section 17 at the prompting of S&N, the rent would have had to have been paid, in order to allow the assignment to proceed. That reason for making the payment would have been sufficient to justify S&N’s claim for an indemnity as regards these payments. The expenditure was not unreasonable or unfair, whether or not valid notices had been served under section 17.

For these reasons, I consider that the judge was right to hold that section 17 of the 1995 Act was not complied with as regards the early instalments of rent, including arrears arising on the rent reviews, but that he was also right to hold that this provides no defence to the claim under the indemnity covenant implied by section 24 of the 1925 Act, because the payments were fairly and reasonably incurred by S&N in the circumstances. It follows that it makes no difference that, as regards the 2003 instalments of rent, section 17 notices were only served on S&N’s prompting.

I would dismiss the appeal, as well as the Respondent’s Notice.

I agree, but add a few observations on the first issue, that relating to the section 17 notices, since, although the result achieved by the judge below and in this court is, I would accept, required by the statutory language, it is one which, in my judgment, was not intended.

Thus I agree that it is not possible to accept Mr Stoner’s submissions in this regard in either their primary or their fall-back form. His primary submission is that the charge for an unreviewed quarter’s rent pending determination of the rent review is a separate charge from the arrears of rent created by the outcome of the review, arrears which first become due for payment on the quarter day following that outcome. Therefore no notice requirements relating to the original quarter’s rent can affect a separate charge only coming due for payment at a later date. His fall-back submission is that, even if there is only one charge, albeit made up of two elements payable at separate times, nevertheless section 17 only bites where the unreviewed rent remains unpaid at the notice date.

As for the primary submission, this focused, as Lord Justice Lloyd has shown, on the language of the prescribed form of notice and also on the contention that “due” found in the phrase in section 17(2) “when the charge becomes due” means “due and payable” or “due for payment”: it therefore excluded future arrears under a completed rent review. The main difficulties with that submission, however, are first, that it is clear from section 17(4) and the prescribed form of notice that the statute intended a section 17(2) notice to cover a situation where current rent was subject to a rent review; secondly, that the “charge” discussed throughout section 17, where it concerns rent, is not simply rent in general but the rent for (say) a particular quarter (as in phrases such as “when the charge becomes due”, “the charge is now due”, “in respect of the charge” and “liable to pay in respect of the charge in question”, all against the background of a due date); and thirdly, that the arrears of reviewed rent when they have been agreed and determined relate back to particular quarters and accrue from their respective quarter days. In those circumstances, it matters not what particular gloss is put on the word “due”. The critical fact is that the subject-matter of the notice is the charge in question, which will incorporate the reviewed rent when that has been determined, and the critical provision then becomes that which says that the former tenant “shall not be liable … to pay any amount in respect of any fixed charge” unless the requisite notice is given.

As for the fall-back submission, this assumes that there is only one charge incorporating both original and reviewed rent, but seeks to distinguish between the situation where the current tenant is in default in respect of the original rent from the situation where he is not. The difficulty with such an approach, however, is that, even though both the language of subsection (2)(a) and (b) as well as the prescribed form of notice appear to assume and reflect the former situation, the tenant’s default is not made a condition of the application of section 17. It remains the case that without a section 17(2) notice, the former tenant is not liable to pay “any amount” in respect of the fixed charge in question. It would be otherwise if section 17(1) provided, as an additional condition, that section 17 only applied where the former tenant was in default, or if a similar requirement were built into section 17(2): but that is not the case. The situation of default is assumed but not required.

In these circumstances, if I could find a way to do justice to the assumption built into section 17(2) and its prescribed form of notice, I would do so, a fortiori since section 17 as a whole is a restriction on the landlord’s common law rights. Moreover, I agree with Lord Justice Lloyd (at para 29 above) where he states that thought was not given, in the formulation of the section as it stands, to the case where there is no default as regards the unreviewed rent but there is a pending review. I would therefore accept that the prohibition on recovery of future arrears of reviewed rent without the service of a notice at each quarter day, even where the current tenant is in good standing, accords ill with the statutory purpose of the section. The former tenant already has notice under his lease about all future rent review dates, and in the light of that is in a position to take whatever personal financial steps he needs to take against the possibility of future default. He will also know, however, in the absence of any section 17(2) notice within six months of each quarter day, that the current tenant remains in good standing. I am not myself comforted, as the judge was, by the thought that it is at least consistent with the intention of the statute to enable the former tenant to sleep easily in respect of each quarter day if no notice is served within six months. The real purpose of the section 17(2) notice, as it seems to me, is to enable the former tenant to know that the current tenant is in default and to act in response to that knowledge. Thus the statute provides by section 19 that the former tenant can, after paying the amount notified, then take an overriding lease, in order to have control over the current tenant and the situation in general. In contrast, there is nothing the former tenant can do to influence a rent review.

I also regard the service of multiple notices merely saying that a rent review is still ongoing as being an uncommercial burden for landlords, without any real compensating benefit to former tenants. At best they can serve as a reminder to the former tenant that arrears of rent may (or may not) be in the process of being accumulated as the rent review continues to drag on. At worst, they will appear, given the prescribed form of the notice, to intimidate the former tenant unnecessarily.

In sum, therefore, I regard the situation disclosed by this litigation to be a true, unintended, anomaly of the legislation as it stands. Nevertheless, and subject to these observations, I agree, essentially for the reasons given by Lord Justice Lloyd, that the judge was right in his decision on this issue, and that the respondent’s notice therefore fails to make good its point.

I agree that the overall outcome is that Mr Raguz’s appeal should be dismissed.

I agree with the judgment of Lord Justice Lloyd.